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Strategic alliances Free essay! Download now

Home > A Level > Economics > Strategic alliances

Strategic alliances

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Downloads to date: N/A | Words: 3550 | Submitted: 31-Oct-2009
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Strategic alliances are agreements between companies (partners) to reach objectives of a common interest. Alliances are among the various options which companies can use to achieve their goals; they are based on cooperation between companies. The description “strategic” limits the field to alliances that are important to the partners and have broad horizons.


Explicit Motives
• Synergy: Synergy means that the merged firm will have a greater value than the sum of its parts as a result of enhanced revenues and the cost base.
• Economies of Scale: Economic of scale refer to the reduction in unit cost achieved by producing a large volume of a product. Horizontal mergers aim at achieving economies of scale. This phenomenon continues while the firm grows to its optimal size, after which a firm experiences diseconomies of scale.
• Economies of Vertical Integration: Economies of vertical integration are achieved in vertical mergers. It makes coordination of closely related operating activities easier.
• Entry to New Markets and Industries: A firm that wants to enter a new market but lacks the know-how can do so through the purchase of an existing player in that product or geographical market. This makes the two firms worth more together than separately.
• Tax Advantages: Past losses of an acquired subsidiary can be used to minimize present profits of the parent company and thus lower tax bills. Thus, firms have a reason to buy firms that have accumulated tax losses.

• Diversification: One of the reasons for conglomerate mergers is diversification of risk. There are two types of risks associated with businesses- systematic and unsystematic risk. Systematic variability cannot be removed by diversification and hence mergers are not able to eliminate this risk. Though, unsystematic risk can be spread through mergers.
• Managerial Motives: The management team of the acquiring firm tends to benefit from the merger activity. The four most important managerial motives for merger are empire building, status, power and remuneration.
Implicit Motives
1. Hubris: It is like a maturity test for the owners and the company boards of directors when they see the opportunity to form a new business cycle.
2. Excess of Money: When a company has excess of money, the question of what to do with it eventually comes up and this leads towards merger and acquisition.
Steps Involved in An Acquisition Valuation
Procedures for Analysing Valuation of the Firm

An acquisition valuation programme can be segregated into five distinct steps like:

Step 1: Establish a motive for the acquisition.
Step 2: Choose a target.
Step 3: Value the target with the acquisition motive built in.
Step 4: Choose the accounting method for the merger/acquisition - purchase or pooling.
Step 5: Decide on the mode of payment - cash or stock.
Implicit Motives
• Financing Mergers

The triangle in the figure provides a view of acquisition financing mechanism. As the options for financing the acquisition would increase, the layers in the triangle would also increase. But the basic question that arises or the consideration that comes is whether the transaction should be made in cash or stock as it has different effect on the various stakeholders of both the organizations the acquiring firm as well as the target firm. The influence of method of payment on post-merger financial performance is ambiguous.

Post merger performance maybe affected by the means of payment in the takeover. There are mainly two ways, in which mergers can be financed,
o Cash
o Stock

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